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Sinopec, PetroChina persevere with shale gas as drilling costs fall

Singapore — China's top two state-owned companies PetroChina and Sinopec are pushing ahead with efforts to commercialize their dedicated shale gas projects in China, mainly because drilling costs have fallen.

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Speaking last week at the company's annual results briefing, Sinopec Chairman Fu Chengyu said shale gas and unconventional gas will continue to be a strategic point of growth for the company, despite falling oil prices and a 12% cut in its capital budget to $22 billion.

This is primarily because gas prices are largely divorced from global oil prices.

"There is no one price in the world for natural gas. Natural gas is priced by location," he said, adding that in China, gas prices are at a healthy level and are able to sustain development.

Sinopec's main focus is on its Fuling shale gas project in southwestern Chongqing municipality.

The company said it has made progress in the first phase, with production capacity of 5 Bcm/year, while daily output of all its producing wells exceeded their design targets last year.

Production capacity is expected to reach 10 Bcm/year by 2017. Fuling gas is currently piped into the company's 8.5 Bcm/year Sichuan-Eastern China gas pipeline network, which also transports gas from its conventional Qingxi, Puguang and Yuanba fields to cities in the eastern region.

"Fuling shale gas project can give good returns. Our investment will not stop," Fu said.

The executive noted that costs for each well at Fuling have fallen to Yuan 80 million ($13 million) from Yuan 100 million previously and are set to decline to Yuan 60 million or less in the next two years.

He said costs continue to fall partly due to efficiency and technological advances, but also because the initial spending on infrastructure such as roads has been sunk so subsequent wells will have different cost structures.

"In the past we said that in the US operators could drill one well for $4 million and we thought that was too far for us to catch up to, but now looking at it, whether our block is in a mountainous or remote area and even if there is poor infrastructure or lack of pipelines, it seems cost effective overall."

PetroChina management echoed similar sentiments on Thursday.

"With advances in technologies, single well costs still have room to fall and production can still rise," President and Vice-Chairman Wang Dongjin said at a press briefing to discuss the company's annual results.

He said drilling costs per well for the company have also dropped to Yuan 55 million-Yuan 60 million, from Yuan 80 million.

"Our costs for shale gas are very competitive compared with ultra-deep wells for conventional gas projects such as in the Tarim Basin [in western China]," Wang said.

PetroChina is targeting shale gas production to reach 6 Bcm/year by 2020.

This year, its target for production capacity to reach 2.6 Bcm/year remains unchanged.

This will come from its Changning-Weiyuan blocks in Sichuan and Zhaotong in southern Yunnan province.

China's Ministry of Land and Resources said in September last year that PetroChina had planned to drill 154 wells over 2014-2015 at Changning and Weiyuan, with total investment of Yuan 11.2 billion.

Both PetroChina and Sinopec's experience with shale gas contrasts with China National Offshore Oil Corp., which said last Friday that it had suspended activity at a shale block in eastern Anhui province because the initial appraisal results did not warrant further investment.

Despite an abundance of shale gas resources, development in China has been slow because of operators' lack of technology and complex geology.

Last year China reduced its official target for shale gas production to 30 Bcm/year by 2020, down from 60-100 Bcm/year set in 2012, mainly because the pace of development has been slower than anticipated. The 2015 target of 6.5 Bcm/year remained unchanged.

China has held two shale gas bid rounds so far, although many of the winners had no experience in oil and gas and did not have the financial means to invest heavily in the blocks.

While the first bid round saw only two blocks awarded in 2011, the ministry gave out 19 blocks to 16 domestic companies in its second tender in late 2012.

Foreign firms were not permitted to participate in the bid rounds, although the winning companies were free to bring in both local and foreign partners.

--Song Yen Ling,
--Edited by Irene Tang,